Commercial Law - Interpreting the Uniform Commercial Code

Commercial Law - Interpreting the Uniform Commercial Code: Methodologies Used, Misused and UnusedGolden Gate University Law Review Volume 20 Issue 1 Ninth Circuit Survey Article 6
January 1990
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Recommended Citation Howard Foss, Commercial Law - Interpreting the Uniform Commercial Code: Methodologies Used, Misused and Unused, 20 Golden Gate U. L. Rev. (1990). http://digitalcommons.law.ggu.edu/ggulrev/vol20/iss1/6
USED, MISUSED AND UNUSED
CIAL CODE
There are two contrasting methodologies for interpreting provisions of the Uniform Commercial Code. l They reflect disa greement as to both the source of the law and the technique to be used in interpreting Code provisions. One approach, referred to herein as the "intra-Code" methodology, treats the U.C.C. as a self-contained whole and requires that the answers to interpre tive questions must be found within the Code itself.2 Under this
• A.S. 1968, Harvard College; J.D. 1973, University of California at Berkeley; Pro fessor of Law, Whittier College School of Law.
1. The Uniform Commercial Code is hereinafter referred to as the Code or the U.C.C. For simplicity, references and citations herein are to U.C.C. sections rather than to their state law counterparts. State law is noted where it differs from the U.C.C.
2. Professor Grant Gilmore explained the concept of a code as a self-contained whole in the following manner:
A "statute," let us say, is a legislative enactment which goes a8 far as it goes and no further: that is to say, when a case arises which is not within the precise statutory language, which reveals a gap in the statutory scheme or a situation not fore seen by the draftsmen (even though the situation is within the
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intra-Code methodology the primary technique is to interpret provisions according to the relevant purposes and policies found within the Code.s The interpretation most consistent with the purposes of a Code provision or with the general purposes of the Code will prevail. A secondary intra-Code technique is to inter pret each provision so that it is consistent with other provisions of the Code."
At the other end of the spectrum is the "extra-Code" meth odology, which permits the V.C.C. to be interpreted with free
general area covered by the statute), then the court should put the statute out of mind and reason its way to decision accord ing to the basic principles of the common law. A "code," let us say, is a legislative enactment which entirely pre-empts the field and which is assumed to carry within it the answers to all possible questions: thus when a court comes to a gap or an unforeseen situation, its duty is to find, by extrapolation and analogy, a solution consistent with the policy of the codifying law; the pre-Code common law is no longer available as an au thoritative source. We may take another, subsidiary distinc tion between "statute" and "code." When a "statute," having been in force for a time, has been interpreted in a series of judicial opinions, those opinions themselves become part of the statutory complex: the meaning of the statute must now be sought not merely in the statutory text but in the statute plus the cases that have been decided under it. A "code," on the other hand, remains at all times its own best evidence of what it means: cases decided under it may be interesting, per suasive, cogent, but each new case must be referred for deci sion to the undefiled code text.
Gilmore, Legal Realism: Its Cause and Cure, 70 YALE L.J. 1037, 1043 (1961). 3. In intra-Code methodology a distinction should be drawn between the source of
interpretation, which is the U.C.C. itself, and the interpretive technique employed. Sev eral techniques are possible utilizing the wisdom embodied in the Code. The most com monly employed technique has been to interpret according to the relevant purposes and policies. See infra notes 27-108 and accompanying text. The natural affinity between the technique of purpose reasoning and the source of the Code has been noted:
Under the true code approach, then, a court should look no further than the code itself for solution to disputes governed by it-its purposes and policies should dictate the result even where there is no express language on point. Problems in in terpreting code language not defined within the code explicitly also would be resolved by reference to the Code's purposes and policies.
Hillman, Construction of the Uniform Commercial Code: UCC Section 1-103 and "Code" Methodology, 18. B.C. L. REV. 655, 657 (1977).
4. In some decisions reviewed herein, courts have justified their interpretation on the ground that one Code provision expressly determines the interpretation of another. Other courts have held that implications from one or more Code provisions determine the interpretation of another. See infra notes 109-158 and accompanying text.
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Golden Gate University Law Review, Vol. 20, Iss. 1 [1990], Art. 6
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1990] COMMERCIAL LAW 31
recourse to outside, non-Code law.1I The extra-Code approach, rather than proceeding from sources within the Code, empha sizes the importance of common laws and statutory law7 as pri-
5. For example, non-Code law has been used to change rights and priorities other wise created by Article 9 of the Code. In T & 0 Mobile Homes, Inc. v. United California Bank, 40 Cal. 3d 441, 220 Cal. Rptr. 627 (1985), the California Supreme Court applied principles of real property law to change the result otherwise applicable under Article 9 in a priority dispute between the buyer of a motor home and a secured party therein. See infra notes 180-187 and accompanying text. In Producers Cotton Oil Co. v. Amstar Corp., 197 Cal. App. 3d 638, 242 Cal. Rptr. 914 (1988), the California Court of Appeal applied the doctrine of unjust enrichment to change the priorities otherwise applicable under Article 9 between a buyer of goods and a secured party. See infra notes 209-212 and accompanying text.
6. Professor Gilmore opined that the common law is an appropriate source of law for interpreting the U.C.C.
Surely the principle function of a Code is to abolish the past. At least a common lawyer assumes that that was the theory on which the great civil law codes were based. From the date of the Code's enactment, the pre-Code law is no longer available as a source of law. The gaps, the ambiguities, the unforeseen situations cannot be referred for decision to the accumulated wisdom of the past. There is a fresh start, a new universe of legal discourse, in which the only permissible way of solving a problem is to find (or pretend to find) the answer in the un defiled, the unconstrued, the uncontaminated text of the Code itself. How well the theory worked in practice, or whether it worked at all, you, as civilians, are much better equipped to say than I. The Uniform Commercial Code, so-called, is not that sort of Code-even in theory. It derives from the common law, not the civil law, tradition. We shall do better to think of it as a big statute-or a collection of statutes bound together in the same book-which goes as far as it goes and no further. It assumes the continuing existence of a large body of pre Code and non-Code law on which it rests for support, which it displaces to the least possible extent, and without which it could not survive. The solid stuff of pre-Code law will furnish the rationale of decision quite as often as the Code's own gos samer substance.
Gilmore, Article 9: What It Does for the Past, 26 LA. L. REV. 285, 285-86 (1966) 7. Extra-Code statutory law has been applied to resolve a matter left unresolved by
the Code. In SCT, USA, Inc. v. Mitsui Manufacturers Bank, 155 Cal. App. 3d 1059, 202 Cal. Rptr. 547 (1984), the California Court of Appeal employed California Code of Civil Procedure § 12, which provides that the "time in which any act provided by law is to be done is computed by excluding the first day, and including the last," to compute the five year effective period of a financing statement under U.C.C. § 9-403(2). See infra notes 171-175 and accompanying text. Such a resort to extra-Code statutory law is untroubling because § 9-403(2) does not resolve the computation issue. On the other hand, it would be more troublesome if statutory law were held to supersede the U.C.C. on an issue to which the U.C.C. speaks. Thus, in Nunes Turfgrass, Inc. v. Vaughn-Jacklin Seed Co., Inc., 200 Cal. App. 3d 1518, 246 Cal. Rptr. 823 (1988), the California Court of Appeal refused to supersede U.C.C. § 2-719 with CAL. CIV. CODE § 1668. Both sections deal with contractual limitations on damages, but the U.C.C. provision was held to be applicable to
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mary sources in resolving doubtful cases under the Code. Under this approach outside law can be used to create an exception to a Code provision8 or to supersede a Code provision.9 The extra Code approach is premised on the notion that the Code drafters could not foresee all possible contingencies and that courts, be ing better able to take account of the factors in a particular case, should recognize and cure unfairness in the application of a Code provision by applying non-Code law.1o
The U.C.C. authorizes both intra-Code methodology and ex tra-Code methodology. The intra-Code approach, with its em phasis on reasoning from purpose and policy, finds support in section 1-102(1), which provides:
This Act shall be liberally construed and applied to promote its underlying purposes and policies. l1
the exclusion of the Civil Code provision. See infra notes 176-179 and accompanying text.
8. See, e.g., Morgan Guaranty Trust Co. v. American Savings and Loan Assoc., 804 F.2d 1487 (9th Cir. 1986), cert. denied, 482 U.S. 929 (1987), wherein the New York right of restitution for mistaken payment creates an exception to the final payment rule of U.C.C. § 3-418.
9. See, e.g., Connecticut Printers, Inc. v. Kroesen, 134 Cal. App. 3d 54, 184 Cal. Rptr. 436 (1982) (common law accord and satisfaction supersedes U.C.C. § 1-207); Citi zens Bank of Roseville v. Taggart, 143 Cal. App. 3d 318, 191 Cal. Rptr. 729 (1983) (com mon law rule supersedes Code regarding rights of lien creditor vis-a-vis cash seller); Joffe v. United California Bank, 141 Cal. App. 3d 541, 190 Cal. Rptr. 443 (1983) (tort negli gence rules supersede U.C.C. in action by depositor against depository bank).
10. The intra-Code reliance on Code sources is undermined by two limitations in herent in statutory drafting. First, it is impossible to draft a statute to cover all contin gencies. Second, even if the drafters foresaw a contingency, their statutory language may be ambiguous. These two factors led one commentator to argue that .extra-Code equita ble principles are usually an appropriate source for interpreting the U.C.C.
Yet the extent to which legislators can write rules to take ac count of equity in the particular case is limited. It is not just that contingencies are not always foreseeable-it would be cumbersome to formulate law even for every foreseeable con tingency. In addition, language is imperfect. And legislators, unlike judges, are not well-suited to take account of circum stantial details that generate equities.
Summers, General Equitable Principles Under Section 1-103 of the Uniform Commer cial Code, 72 Nw. U.L. REV. 906, 907 (1978).
11. U.C.C. § 1-102 not only requires intra-Code purpose reasoning according to un derlying purposes and policies, but also defines those underlying purposes and policies according to which the Code is to be construed. U.C.C. § 1-102 (2) provides:
(2) Underlying purposes and policies of this Act are (a) to simplify, clarify and modernize the law governing
commercial transactions; (b) to permit the continued expansion of commercial
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Not only do the purposes and policies underlying the Code12
provide interpretive guidance, but also the purposes and policies underlying each provision of the Code likewise provide a basis for interpretation. The Official Comment to section 1-102 provides:
The Act should be construed in accordance with its underlying purposes and policies. The text of each section should be read in light of the pur pose and policy of the rule or principle in ques tion, as also of the Act as a whole, and the appli cation of the language should be construed narrowly or broadly, as the case may be, in con formity with the purposes and policies involved. 18
In addition to section 1-102, there are other aspects of the Code that lend support for the primacy of intra-Code methodol ogy. Recent scholarship indicates that the Code was drafted ac cording to a "patent reason" technique to include reason, pur pose and policy in each section with the conscious goal that Code provisions should be applied and interpreted accordingly. 1.
In fact, some Code sections are solely policy statements which can be used to solve interpretive questions. 111 Even where it was
12. [d.
practices through custom, usage, and agreement of the parties; (c) to make uniform the law among the various
jurisdictions.
13. Official Comment 1 to § 1·102. This comment also provides that "the proper construction of the Act requires that its interpretation and application be limited to its reason." [d.
14. Gedid, U.C.C. Methodology: Taking a Realistic Look at the Code, 29 WMo & MARY Lo REV. 341 (1986) [hereinafter, Gedidl.
15. For example, UoCoCo § 1·106, which adopts the expectation measure of damages as the favored measure of damages under the Code, can be used to interpret ambiguities in the application of other damages provisions. It can even have a substantive effect of its own, as in Allied Canners & Packers, Inc. v. Victor Packing Co., 162 Cal. App. 3d 905, 209 Cal. Rptr. 60 (1984), where U.C.Co § 1·106 was held to supersede UoCoCo § 2·713 as the measure of damages. See infra notes 47·53 and accompanying text. Section 1·106 provides:
§ 1·106. Remedies to be Liberally Administered. (1) The remedies provided by this Act shall be liberally ad· ministered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed but neither consequential or special nor penal damages may be had except as specifically provided in this Act or by other rule of law. (2) Any right or obligation declared by this Act is enforceable
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inconvenient to draft policy on the face of the statute, such pol icy can often be found in the relevant Official Comments. Thus, the comments are an important aspect of the patent reason de vice, because they provide the reason, policy and purpose neces sary for interpreting Code provisions under the intra-Code methodology. IS
On the other hand the extra-Code approach finds ample support in the Code as well. Section 1-103 provides:
Unless displaced by the particular provisions of this Act, the principles of law and equity, includ ing the law merchant and the law relative to ca pacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mis take, bankruptcy, or other validating or invalidat ing cause shall supplement its provisions.17
This section instructs courts to apply extra-Code principles unless such law is "displaced" by the Code. Therefore, where ex tra-Code principles are not displaced, courts are to use them. Conversely, where extra-Code principles are displaced by the Code, courts may not use them. Unfortunately, the Code does not explain when an extra-Code principle is displaced and when it is not.
B. EXAMPLES OF INTERPRETIVE DISPUTES
Numerous types of interpretive disputes have arisen wherein the choice of interpretive methodology can affect the re sult. For example, the parties might dispute whether a particular Code provision applies to their dispute. I8 If the court is recep-
by action unless the provision declaring it specifies a different and limited effect.
16. See Gedid, supra note 14, at 382-83. 17. To the same effect is Official Comment 1 to u.c.c. § 1-103, which provides that
section 1-103 "indicates the continued applicability to commercial contracts of all sup plemental bodies of law except insofar as they are explicitly displaced by this Act .... tt
18. See, e.g., In re Pacific Trencher, 735 F.2d 362 (9th Cir. 1984) (issue of whether U.C.C. § 9-402(8) applies or whether extra-Code doctrine of reformation for mistake pre empts it); T & 0 Mobile Homes, Inc. v. United California Bank, 40 Cal. 3d 441, 220 Cal. Rptr. 627 (1985) (issue of whether Article 9 priority scheme applies against buyer of
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tive to extra-Code methodology, it is more likely to hold that an appealing principle of extra-Code law supersedes the Code pro vision than if the court reasons according to intra-Code method ology. A related interpretive problem occurs where the parties dispute whether one of them is entitled to an exception to an otherwise applicable Code provision. The party urging an excep tion might prevail if the court will use extra-Code law such as fraud, mistake or estoppel to create the exception, whereas such party might lose if the court reasons solely from within the Code according to the logic of the Code and the purposes of the Code provisions involved.19
An example of such a situation might be found in an oral contract for the sale of goods where the seller sues the buyer and the buyer defends on the ground that the statute of frauds20 is not satisfied. Assume that the buyer represented to the seller that the buyer would perform, and in reliance thereon the seller missed resale opportunities that are now permanently lost be cause the goods have spoiled.21 Under extra-Code methodology, it might be possible to apply the doctrine of promissory estoppel to create an extra-Code exception to the statute of frauds. The buyer would thereby be estopped from asserting the statute of frauds because of the buyer's promise to the seller.22 On the other hand, under intra-Code methodology, the result in this
motor horne where filing officer omitted indication of security interest on certificate of title); Ford Motor Credit Co. v. Price, 163 Cal. App. 3d 745, 210 Cal. Rptr. 17 (1985) (issue of whether notice requirements of CAL. COM. CODE § 9504(3) apply or whether substantial compliance is sufficient).
19. Examples of cases where courts have used extra-Code law to create exceptions to Code provisions are: Morgan Guaranty Trust Co. v. American Savings and Loan Assoc., 804 F. 2d 1487 (9th Cir. 1986), cert. denied, 482 U.S. 929 (1987) (common law restitutionary remedy held to be an exception to § 3-418 final payment rule); Allied Grape Growers v. Bronco Wine Co., 203 Cal. App. 3d 432, 249 Cal. Rptr. 872 (1988) (non-Code promissory estoppel held an exception to § 2-201 statute of frauds); Produc ers Cotton Oil Co. v. Amstar Corp., 197 Cal. App. 3d 638, 242 Cal. Rptr. 914 (1988) (unjust enrichment held to create exception to priorities otherwise dictated by Article 9).
20. U.C.C. § 2-201, infra note 189. 21. These facts are suggested by Allied Grape Growers v. Bronco Wine Co., 203 Cal.
App. 3d 432, 249 Cal. Rptr. 872 (1988). 22. Courts in other jurisdictions using extra-Code methodology have applied the
doctrine of promissory estoppel as an exception to the statutue of frauds. See, e.g., At lantic Wholesale Co., Inc. v. Solondz, 320 S.E. 2d 720 (S.C. App. 1984); Northwest Potato Sales, Inc. v. Beck, 208 Mont. 310, 678 P. 2d 1138 (1984); Potter v. Hatter Farms, Inc., 56 Ore. App. 254, 641 P. 2d 628 (1982); Ralston Purina Co. v. McCollum, 611 S.W. 2d 201 (Ark. App. 1981). See generally, Metzger and Phillips, Promissory Estoppel and Section 2-201 of the Uniform Commercial Code, 26 VILL. L. REV. 63'(1980).
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case would be to bar the seller because the Code's statute of frauds for goods is not otherwise satisfied and contains no excep tion for promissory estoppel. 23
In another type of interpretive dispute, the parties might disagree over which of two conflicting Code provisions applies to their dispute. 24 In this situation one Code provision is more favorable to the plaintiff and the other Code provision more favorable to defendant. If the court chooses according to which provision better comports with a favored extra-Code principle, a different result may be had than if the choice is made by resort to the internal logic of the Code and the purpose of the relevant provisions.
Another type of interpretive problem involves interpreting ambiguities in the meaning of Code provisions. Assuming that a Code provision does apply, the parties might dispute what it means when applied to the facts of the parties' case. Such ambi guities often arise due to definitional gaps or inconclusive draft ing.211 Where such ambiguities are interpreted to give a result conforming to extra-Code law, the result might differ from an interpretation based on conformity with the purpose of the rele vant Code provision or with some other Code provision.
C. THE PROBLEM
The Code authorizes both intra-Code and extra-Code meth odology. The choice of methodology may be an important factor in determining the interpretation. Yet the Code does not resolve the questions of how to apply these methodologies, whether
23. The Ninth Circuit reflected this view when it rejected an estoppel exception to V.C.C. § 2-201 in C.R. Fedrick, Inc. v. Borg·Warner Corp., 552 F.2d 852 (9th Cir. 1977).
24. See, e.g., Farmers & Merchants State Bank v. Western Bank, 841 F.2d 1433 (9th Cir. 1987) (possible applicability of § 4-213(1) superseded by § 3-418); Allied Canners & Packers, Inc. v. Victor Packing Co., 162 Cal. App. 3d 905, 209 Cal. Rptr. 60 (1984) (possi· ble applicability of § 2-713 superseded by § 1-106).
25. See, e.g. Connolly v. Bank of Sonoma County, 184 Cal. App. 3d 1119, 229 Cal. Rptr. 396 (1986) (whether a guarantor is a "debtor" entitled to protections under § 9- 504(3»; In re Black & White Cattle Co., 783 F.2d 1454 (9th Cir. 1986) (what is "commer· cially reasonable time" under § 2-402(2»; In re Borba, 736 F.2d 1317 (9th Cir. 1984) (when has a transfer been "concealed" under § 6-111); In re World Financial Services Center, Inc. 78 B.R. 239 (9th Cir. BAP 1987) (what form of the debtor's name is required to satisfy § 9-402(1».
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courts must choose between them, and if a choice must be made, how to choose. Because it is possible to disagree on the answers to these questions,26 it is predictable that the courts' approach to Code methodology has been uncertain. The purpose of this article is to examine the methodologies actually used by the courts in construing the U.C.C., to critique that methodology and to suggest a methodological approach for the future. The cases examined are decided by the Ninth Circuit and the Cali fornia courts.
II. DECISIONS INTERPRETING THE UNIFORM COM MERCIAL CODE
In interpreting prOVISIons of the U.C.C., the courts have used a bewildering array of intra-Code methodology, extra-Code methodology, and no articulated methodology at all. In addition,
26. Commentators have argued various positions along the spectrum running from pure intra-Code methodology to pure extra-Code methodology. For example, Professor Gedid has recently argued for the intra-Code approach. He argues that Karl Llewellyn's understanding of the judicial process led him to exert his great influence to cause the V.C.C. to be drafted in Code form. It was Llewellyn'S goal to explain within the Code the policy, purpose and reason behind the Code's provisions. Professor Gedid concludes that the source of Code interpretation should therefore be from within the Code and the technique for interpreting a Code provision should be to consider the purpose of that provision and the relationship of that provision to other Code provisions. See Gedid, supra note 14.
Professor Hillman has argued for a modified "true code" approach that permits re sort to extra-Code rules where neither Code language nor Code purposes and policies are useful. This approach, while still favoring intra-Code interpretation, is positioned along the spectrum at a point closer to extra-Code methodology than the methodology favored by Professor Gedid. Hillman, Construction of the Uniform Commercial Code: UCC Sec tion 1-103 and "Code" Methodology, 18 B.C. L. REV. 655 (1977) [hereinafter, Hillman].
Professor Nickles takes a position in the middle of the spectrum. He argues that, because neither approach is ideally suited to interpreting the U.C.C., courts should have the option either to use common law principles or to reason from within the U.C.C. based on purposes and analogies to other V.C.C. provisions. Whichever approach is taken, how ever, must be consistent with the purposes of the U.C.C. expressed in § 1-102(2). Nickles, Problems of Sources of Law Relationships Under the Uniform Commercial Code -Part II: The English Method and Solution to the Methodological Problem, 31 ARK. L. REV. 171 (1977) [hereinafter, Nickles].
Professor Summers has taken a position closer to the end of the spectrum repre sented by extra-code methodology. He recommends giving great weight to common law equitable principles to supplement, modify and explain V.C.C. provisions. Vnder his ap proach common law equitable principles are available not only to fill gaps created by Code silence, but also to modify and create exceptions to Code provisions. Summers, General Equitable Principles Under Section 1-103 of the Uniform Commercial Code, 72 Nw. V.L. REV. 906, 934-35 (1978).
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the courts have failed to articulate a standard for electing which methodology to apply.
A. INTRA-CODE METHODOLOGY
Courts have employed numerous intra-Code techniques. Some courts have adopted an interpretation because such inter pretation advances the purpose of the interpreted provision. Similarly, courts have rejected interpretations which are at odds with the purpose of the interpreted provision. Courts have also used the intra-Code technique of interpreting one Code provi sion by resort to other Code provisions. Sometimes such other Code provisions are held expressly to resolve interpretive ques tions. In other instances, Code provisions resolve interpretive questions by implication. The following are examples of these techniques.
1. Interpretation To Advance Purpose of Provision
The pattern of reasoning in these cases can be described summarily. The court establishes the purpose of the provision27
and then determines whether an arguable interpretation is in harmony with that purpose. If so, the court adopts the interpre tation as the law of the case. Using such reasoning, courts have filled in definitional gaps, interpreted ambiguous provisions, and chosen between conflicting provisions.
27. A court need not expressly state the purpose of the interpreted provision in or der to reason from that purpose. Purpose reasoning may proceed from the unstated pur pose of the provision. For example, in In re World Financial Services Center, Inc., 78 B.R. 239 (9th Cir. BAP 1987), the court used purpose reasoning to fill in a definitional gap in U.C.C. § 9-402(1) but did not expressly articulate the purpose of the provision. Section 9-402(1) provides that a proper financing statement must contain the name of the debtor, but does not elaborate on the name required. Although not expressly articu lated by the court, the purpose of this debtor-name requirement is to protect the subse quent creditors by insuring that they can find a financing statement after it has been indexed by the name of the debtor appearing thereon. Thus the debtor-name require ment should be interpeted to require that the name of the debtor must be indentified in the financing statement in such a way that a reasonable search of the recorded financing statements would disclose the financing statement. In World Financial Services Center the financing statement identified the debtor as "Margaret Howe, dba Bargain Furn/ World Finance" whereas the debtor's actual name was "World Financial Servies Center, Inc." This language was held not to satisfy § 9-402(1) because the financing statement would not be found by subsequent creditors due to the faulty debtor name. [d. at 242.
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In Connolly v. Bank of Sonoma County,28 the California Court of Appeal used such purpose reasoning to fill in a defini tional gap in the Code regarding the question of whether a guar antor should be treated as a "debtor" under Article 9, thereby giving the guarantor the protections of a debtor. Such protec tions include the right of the debtor to receive notice of a sale of collateral by the secured party29 and a prohibition against the debtor's pre-default waiver of its right to such notice.30 It is un clear from the Code whether a guarantor is a debtor entitled to
28. 184 Cal. App. 3d 1119, 229 Cal. Rptr. 396 (1986). 29. The secured party must notify the debtor of the intended disposition of collat-
eral. U.C.C. § 9-504(3) provides: (3) Disposition of the collateral may be by public or private proceedings and may be made by way of one or more con tracts. Sale or other disposition may be as a unit or in parcels and at any time and place and on any terms but every aspect of the disposition including the method, manner, time, place, and terms must be commercially reasonable. Unless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, reasonable noti fication of the time and place of any public sale or reasonable notification of the time after which any private sale or other intended disposition is to be made shall be sent by the secured party to the debtor, if he has not signed after default a state ment renouncing or modifying his right to notification of sale. In the case of consumer goods no other notification need be sent. In other cases notification shall be sent to any other se cured party from whom the secured party has received (before sending his notification to the debtor or before the debtor's renunciation of his rights) written notice of a claim of an in terest in the collateral. The secured party may buy at any public sale and if the collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations he may buy at private sale.
In California, if the secured party fails to give the required notice, the secured party is barred from recovering a deficiency judgment from the debtor. Barber v. LeRoy, 40 Cal. App. 3d 336, 344, 115 Cal. Rptr. 272, 277-78 (1974). Some jurisdictions have taken a different view of such secured party non-compliance and have in such circumstances im posed on the secured party a rebuttable presumption that the value of the collateral is equal to the debt. See Foss, The Noncomplying Secured Party's Right to a Deficiency, 21 U.C.C. L. J. 226 (1989).
30. U.C.C. § 9-504(3) imposes the notice requirement only where the debtor "has not signed after default a statement renouncing or modifying his right to notification of sale." U.C.C. § 9-501(3) provides that such protection from pre-default waiver may not be waived:
To the extent that they give rights to the debtor and impose duties on the secured party, the rules stated in the subsections referred to below may not be waived or varied .... [followed by reference to § 9-504(3»)"
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such protection, because the term "debtor" is not defined with reference to the term guarantor.31 The Connolly court held that a guarantor is a debtor entitled to the foregoing debtor's protec tions, and grounded its result on advancing the purpose of the debtor-protective provisions.32 Reasoning with regard to the no tice requirement, the court determined that the purpose of the notice requirement is to protect the obligor from potentialliabil ity for a deficiency judgment by giving the obligor an opportu nity to bid at the sale and by preserving the obligor's right to redeem the collateral. 33 Once the guarantor becomes the likely primary obligor and the likely target of the creditor (i.e., upon the debtor's default), the purpose of the notice requirement is best served by treating the guarantor as a debtor entitled to such notice. As the primary obligor, the guarantor's interest in receiving notice of sale is at least as great as the debtor's.34 The same reasoning applies to the anti-waiver provision. Once its debtor-protective purpose applies to the guarantor, the guaran tor should be treated as a debtor entitled to its protections.311
Two subsequent decisions of the California courts have em braced the Connolly reasoning.36
Courts have used purpose reasoning to interpret ambiguities in Code provisions.37 An example of such an ambiguous provi-
31. V.C.C. § 9-105(1)(d) defines the term "debtor" as follows: "Debtor" means the person who owes payment or other per formance of the obligation secured, whether or not he owns or has rights in the collateral, and includes the seller of accounts or chattel paper. Where the debtor and the owner of the col lateral are not the same person, the term "debtor" means the owner of the collateral in any provision of the Article dealing with the collateral, the obligor in any provision dealing with the obligation, and may include both where the context so requires;
32. Connolly, 184 Cal. App. 3d at 1124-25, 229 Cal. Rptr. at 399-400. 33. Id. at 1124, 229 Cal. Rptr. at 399. 34. Id. at 1124-25, 229 Cal. Rptr. at 399. 35. Id. at 1125, 229 Cal. Rptr. at 400. 36. American National Bank v. Perm a-Tile Roof Co., 200 Cal. App. 3d 889, 246 Cal.
Rptr. 381 (1988); C.I.T. Corp. v. Anwright Corp., 191 Cal. App. 3d 1420, 237 Cal. Rptr. 108 (1987). Another California decision held that a guarantor is not a debtor for pur poses of the prohibition against pre-default waiver. Rutan v. Summit Sports, Inc., 173 Cal. App. 3d 965, 219 Cal. Rptr. 381 (1985). This court did not disclose its reasoning but simply cited one case from another jurisdiction. See infra notes 224-227 and accompany ing text.
37. For example, the facts of Procyon Corp. v. Components Direct, Inc., 203 Cal. App. 3d 409, 249 Cal. Rptr. 813 (1988), create an ambiguity in § 2-201(2), the Code's
12
1990) COMMERCIAL LAW 41
sion is section 5·114(2)(b),38 under which the issuer of a letter of
statute of frauds for goods, infra note 189. That section provides that a written confir mation of a contract which is "sufficient against the sender" will satisfy the requirements of the statute of frauds against the recipient of a confirmation, if the recipient does not give written notice of objection to the confirmation within ten days after it is received. Thus, if a seller of goods fails to deliver, the statute of frauds ordinarily would require the plaintiff buyer to produce a writing signed by the seller to satisfy the statute of frauds. However, if the buyer sends a written confirmation to the seller and that writing is sufficient to satisfy the statute of frauds against the buyer, then under § 2-201(2) the buyer may use the same confirmation to satisfy the statute of frauds against the seller. In the Procyon case, the issue was whether a letter of credit issued by the buyer's bank at the buyer's request and delivered to the seller satisfied the statute of frauds against the buyer, so as to be "sufficient against the sender" under § 2-201(2). If so, the buyer could use the letter of credit to satisfy the statute of frauds against the seller. Procyon Corp. had a contract to purchase computer chips from Components. In order to assure itself that Procyon would be bound to the contract, Components had required that Pro cyon procure a letter of credit in favor of Components. Procyon's bank issued a letter of credit which included the contract terms. When Components failed to deliver, Procyon sued for breach of oral contract. Components defended on the ground that, because Components had not signed any contract, the statute of frauds precluded Procyon from suing for a breach.
The Court of Appeal held that the letter of credit was "sufficient against the sender" under § 2-201(2). The Court of Appeal justified its broad interpretation of "sufficient against the sender" by resort to two of the purposes of § 2-201(2). According to the court, one purpose of that section is to expedite confirmation of oral contracts among commercial traders. [d. at 412, 249 Cal. Rptr. at 816. A second purpose is to equalize the position of both sides and avoid giving the recipient of a confirmation the advantage of being able to watch a fluctuating market knowing he can bind but not be bound. [d. at 413, 249 Cal. Rptr. at 816. It is apparent that both purposes are served by permitting the letter of credit to operate against Procyon under § 2-201(2). The contrary result would defeat those purposes by giving Components the advantage of holding Procyon to the contract while not being held itself.
In holding that the letter of credit was "sufficient against the sender" the Court of Appeal addressed two problems raised by the facts. First, the letter of credit had not been signed by Procyon, as would be required to make the letter of credit sufficient against Procyon under § 2-201(1). In reply to this argument the Court of Appeal stated that the Bank had acted as Procyon's agent for the letter of credit and that the Bank's signature on the letter had been adopted by Procyon. Therefore, based on the broad definition of "signed" in § 1-201(39) ("any symbol ... adopted by a ... party ... to authenticate a writing"), the Court of Appeal held that Procyon had "signed" the letter as required to make the letter of credit sufficient against it. Second, the Court also held that the letter of credit contained a sufficient memorial of the contract to satisfy § 2- 201(1). [d. at 413, 249 Cal. Rptr. at 815-16.
38. U.C.C. § 5-114(2) provides: (2) Unless otherwise agreed when documents appear on their face to comply with the terms of a credit but a required docu ment does not in fact conform to the warranties made on ne gotiation or transfer of a document of title (Section 7-507) or of a certificated security (Section 8-306) or is forged or fraudu lent or there is fraud in the transaction:
(a) the issuer must honor the draft or demand for pay ment if honor is demanded by a negotiating bank or other holder of the draft or demand which has taken the draft or
13
credit may refuse to honor it if "there is fraud in the transac tion". The facts of FDIC v. Bank of San Francisc039 demon strate the ambiguity in the quoted language. In that case there was fraud alleged in the underlying transaction between the cus tomer and the beneficiary of the letter of credit.40 The defendant issuer refused to honor the letter of credit on the ground that, by reason of fraud in the underlying transaction, there was "fraud in the transaction" within the meaning of section 5- 114(2)(b).41 However, if "fraud in the transaction" refers to fraud in the presentation of the required documents to the is suer, rather than fraud in the underlying transaction, then the issuer would not have the option under section 5-114(2)(b) to dishonor the letter of credit because the documents presented to the issuer in FDIC V. Bank of San Francisco were the correct and unforged documents.
The Ninth Circuit interpreted section 5-114(2)(b) so that "fraud in the transaction" refers to fraud in the presentation of documents to the issuer and not fraud in the underlying deal between the customer and the beneficiary. The court reasoned that this result advanced an important purpose of letters of credit, i.e., to guarantee assured payment to the beneficiary. An interpretation that permits an issuer to avoid payment on the grounds of fraud in the transaction between the issuer's cus tomer and the beneficiary would defeat that purpose and invite uncertainty and litigation instead of assured payment.42
demand under the credit and under circumstances which would make it a holder in due course (Section 3-302) and in an appropriate case would make it a person to whom a document of title has been duly negotiated (Section 7-502) or a bona fide purchaser of a certificated security (Section 8-302); and
(b) in all other cases as against its customer, an issuer act ing in good faith may honor the draft or demand for payment despite notification from the customer of fraud, forgery or other defect not apparent on the face of the documents but a court of appropriate jurisdiction may enjoin such honor.
The distinction between paragraph (a), where the issuer must honor the letter of credit, and paragraph (b), where the issuer may refuse to honor the letter of credit, is that in the latter situation no innocent third parties would be hurt by the issuer's refusal to honor. Official Comment 2 to § 5-114.
39. 817 F.2d 1395 (9th Cir. 1987). 40. [d. at 1397. 41. [d. at 1399. 42. [d. The court also reasoned from an extra-Code source. It cited the statement of
the Comptroller of the Currency, 12 C.F.R. § 7.7016, that "as a matter of sound banking
14
In In re Shooting Star Enterprises, Inc."3 the Bankruptcy Appellate Panel of the Ninth Circuit interpreted the term "pro ceeds" according to the court's view of the purpose of section 9- 306,'" wherein a security interest continues to operate in favor of a secured party in the proceeds of collateral. In this case, the debtor's trustee in bankruptcy had purported to sell only a so called equity portion of the collateral and not the portion of col lateral necessary to pay the debt owed to the secured party. The trustee argued that the payment received by the trustee for the portion of collateral representing the debtor's equity should not constitute proceeds of the collateral and that therefore the se cured party's interest in such non-proceeds could not continue pecause such security interest only continues in proceeds."11 Al though proceeds is defined to include "whatever is received" when collateral is sold, the court held that the payment for the equity portion did not constitute proceeds and could not be reached by the secured party. The court justified its narrow in terpretation of the term "proceeds" by the admonition of Offi cial Comment 3 to section 9-306 prohibiting the secured party from a double recovery."s Applying this policy, the court rea soned that the secured party was sufficiently protected by its in terest in the collateral and that to give the secured party an in terest in the receipts for the equity portion might give it a double recovery.
When two Code provisions arguably apply to the same situ-
policy" the issuer "must not be called upon to determine questions of fact or law be tween the account party and the beneficiary." [d.
43. 76 B.R. 154 (9th Cir. BAP 1987). 44. U.C.C. § 9-306(1) and (2) provide:
(1) "Proceeds" includes whatever is received upon the sale, ex change, collection or other disposition of collateral or pro ceeds. Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than a party to the security agreement. Money, checks, deposit accounts, and the like are "cash proceeds". All other proceeds are "non-cash proceeds". (2) Except where this Article otherwise provides, a security in terest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including col lections received by the debtor.
45. Shooting Star Enterprises, 76 B.R. at 156. 46. [d. at 157.
15
ation, and they lead to different or contradictory results,· a court must interpret which provision governs. Using purpose reasoning the California Court of Appeal recently made such an interpre tation in Allied Canners & Packers, Inc. v. Victor Packing Co;n Section 2-71348 establishes that the measure of damages for an aggrieved buyer is the difference between the market price of the goods and the contract price. On the other hand, section 1- 10649 provides that remedies are to be administered to the end that "the aggrieved party may be put in as good a position as if the other party had fully performed". These two provisions con flicted on the facts of the Allied Canners case. Damages under section 2-713 would have been approximately $150,000 whereas the actual loss suffered by the aggrieved buyer (and therefore the amount necessary to put the buyer in the same position as performance under section 1-106) was only $4,462.50.110 The dif ference occurred because the buyer had a resale contract for the goods on which, because its forward buyer declined to sue it for breach, it lost only the smaller amount, whereas the market value of the goods exceeded the contract price by the larger amount.
The Court of Appeal analyzed the purpose behind each pro vision to determine which provision should govern. Unfortu nately, this reasoning disclosed that the purposes of the two sec tions were in opposition. The purpose of section 2-713 is to disregard the buyer's actual loss, thereby disregarding the actual amount necessary to make the buyer whole, and instead to pro vide a convenient mechanism based on market value for liqui dating the buyer's damages. III On the other hand, the purpose of section 1-106 is expressly to put the aggrieved party "in as good a position as if the other party had performed" and accomplish-
47. 162 Cal. App. 3d 905, 209 Cal. Rptr. 60 (1984). 48. U.C.C. § 2-713(1) provides:
(1) Subject to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any inci dental and consequential damages provided in this Article (Section 2-715), but less expenses saved in consequence of the seller's breach.
49. See U.C.C. § 1-106, supra note 15. 50. Allied Canners, 162 Cal. App. 3d at 912, 209 Cal. Rptr. at 64. 51. [d. at 912-14, 209 Cal. Rptr. at 64-65.
16
ing that purpose requires an award of the actual damages in curred rather than a convenient substitute such as market value damages. 1I2 The court applied section 1-106 in preference to sec tion 2-713, although it did not articulate why the policy of the former prevails over the policy of the latter, and held that the buyer was entitled only to the lesser amount of damages. liS
2. Interpretation Where Purpose of Provision Inapplicable
In this situation, the purpose of the Code provision would neither be advanced nor contradicted by its application to the facts of the case. Despite the seeming neutrality of this situa tion, courts have interpreted Code provisions to be inapplicable where the purpose of the provision appears aimed at circum stances different from those before the court. There is no need to apply the Code provision in such circumstances.
For example, in Nevada National Leasing Co. v. Herefordll4
the California Supreme Court held inapplicable the "forced sale" provision of section 2-328(4).1111 Under section 2-328(4) the buyer at an auction for the sale of goods is generally protected from undisclosed bidding by a seller of the auctioned goods, but an exception to this rule is applied in the case of a "forced sale." Because the term "forced sale" is not defined in the U.C.C., the court had to interpret its applicability to the facts of the case. The court reasoned from the purpose of the forced sale excep tion. That purpose is to give the seller the mechanism of undis closed bidding in order for the seller to avoid the unfair, low prices often received by sellers in a distress sale environment.1I8
On the facts of Nevada National Leasing Co., where the owner of leased equipment decided to auction it off after two lessees
52.Id. 53. Id. at 915, 209 Cal. Rptr. at 66. 54. 36 Cal. 3d 146, 203 Cal. Rptr. 118 (1984). 55. V.C.C. § 2-328(4) provides:
(4) If the auctioneer knowingly receives a bid on the seller's behalf or the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved, the buyer may at his option avoid the sale or take the goods at the price of the last good faith bid prior to the completion of the sale. This subsection shall not apply to any bid at a forced sale.
56. Nevada National Leasing, 36 Cal. 3d at 152, 203 Cal. Rptr. at 121.
17
had defaulted,1I7 this purpose was inapplicable because the seller voluntarily conducted the sale, could have made alternative ar rangements for disposing of the equipment, and was protected from an unfair price in any event because the auction was con ducted "with reserve."118 In addition the sale was not the execu tion sale typically associated with unfairly low prices. Because the purpose of the forced sale exception did not apply, the court held the forced sale exception inapplicable.1I9
Another example of the inapplicability of a Code provision based on the inapplicability of its purpose can be found in Se curity Pacific Bank v. Geernaert.60 There the court created an exception to the requirement under section 9-504(3)61 that the secured party must notify the debtor concerning the sale of col lateral. The purpose of the notice requirement is to guarantee fairness in the resale, but in Geernaert such fairness was auto matically guaranteed without requiring the secured party to no tify the debtor of the sale, because a court-ordered receiver con ducted the sale. The reason for the notice requirement not being present, an exception to such requirement was created for the situation where collateral is sold by a court-ordered receiver.62
Courts sometimes disagree as to the inapplicability of the purpose of a Code provision. When this happens, those courts may reach conflicting conclusions and results. One such conflict recently arose regarding California's variation of section 5_114.63
57. Id. at 148, 203 Cal. Rptr. at 119. 58. Id. at 152-53, 203 Cal. Rptr. at 121-22. 59. Id. at 153, 203 Cal. Rptr. at 122. 60. 199 Cal. App. 3d 1425, 245 Cal. Rptr. 712 (1988). 61. U.C.C. § 9-504(3) supra note 29. The California version differs, although the dif
ferences are not relevant in the context of Security Pacific Bank v. Geernaert. See CAL. COM. CODE § 9504(3), infra notes 85 and 86.
62. Geernaert, 199 Cal. App. 3d at 1431, 245 Cal. Rptr. at 715-16. 63. The Uniform Commercial Code and the California Commercial Code conflict on
the question of whether a court may enjoin the honor of a letter of credit. U.C.C. § 5- 114(2)(b) provides: .
(2) Unless otherwise agreed when documents appear on their face to comply with the terms of a credit but a required docu ment does not in fact conform to the warranties made on ne gotiation or transfer of a document title (Section 7-507) or of a certificated security (Section 8-306) or is forged or fraudulent or there is fraud in the transaction:
(b) in all other cases as against its customer, an issuer acting
18
California intentionally prohibits courts from enJommg the honor of a letter of credit. The question arose whether the Cali fornia version, although generally preventing courts from en joining the honor of a letter of credit, could be interpreted as subject to an exception that a court may enjoin the beneficiary of a letter of credit from seeking payment even though the court could not enjoin the issuer from paying. Although the practical effect of enjoining the beneficiary is the same as enjoining the issuer (i.e., no payment under the letter of credit), the California Court of Appeal in Mitsui Manufacturers Bank v. Texas Com merce Bank-Fort Worth84 held that a lower court could enjoin the beneficiary from seeking payment. The court reasoned that the purpose of the California version of section 5-114 is inappli cable where the beneficiary is enjoined. The purpose is disclosed in the California Code Comment to section 5-114, namely that
in good faith may honor the draft or demand for payment de spite notification from the customer of fraud, forgery or other defect not apparent on the face of the documents but a court of appropriate jurisdiction may enjoin such honor.
On the other hand California Commercial Code § 5114(2)(b) reads identically except for the deletion of the phrase "but a court of appropriate jurisdiction may enjoin such honor." The purpose for the California deletion is stated in California Code Comment 6:
The phrase "but a court of appropriate jurisdiction may enjoin such honor," which appears at the end of subdivision 2(b) of the 1962 Official Text is omitted. This provision for a protective injunction was omitted because:
"By giving the courts power to enjoin the honor of drafts drawn upon documents which appear to be regular on their face, the Commissioners on Uniform State Laws do violence to one of the basic concepts of the letter of credit, to wit, that the letter of credit agreement is independent of the underlying commercial transaction. . . ." The reasons for this change in the California version are stated even more strongly by the State Bar Committee:
"The State Bar Committee and the Advisory Committee believe this part of section 15114 [5114] would undermine the parties' basic understanding of a letter of credit transaction, namely that the seller is assured of payment upon tender of the called for documents, and that the buyer must sue the seller in his own country for any claimed breach of contract. To permit a court to enjoin the honor of the draft would throw the burden on the seller of litigating in the buyer's country whenever the buyer raised a claim of 'fraud'. For this reason, this provision is contrary to one of the basic concepts of the letter of credit: its independence of the underlying commercial transaction. . . ."
64. 159 Cal. App. 3d 1051, 206 Cal. Rptr. 218 (1984).
19
the "power to enjoin the honor of drafts drawn upon documents which appear to be regular on their face" does "violence to one of the basic concepts of the letter of credit, to wit, that the letter of credit agreement is independent of the underlying commercial transaction."61i The purpose of the California version is thus to protect the issuer from becoming involved in the underlying transaction, as would necessarily happen if the issuer's customer could enjoin the issuer from payment on the grounds of fraud in the underlying transaction. This purpose is not served with re spect to the beneficiary, however, because the beneficiary is al ready involved in the underlying transaction (typically as the seller in a buy-sell transaction). Therefore, the Court of Appeal held that the beneficiary could be enjoined.66
On the other hand, the Ninth Circuit has rejected the ex ception created in Mitsui Manufacturers Bank. The Ninth Cir cuit's reasoning was also based on the purpose of the California rule. However, the Ninth Circuit reached the opposite conclu sion regarding the applicability of that purpose to the benefi ciary. In Trans Meridian Trading Inc. v. Empresa Nacional de Comercializacion de Insumos,67 the court reasoned that the pur pose for California's version is broader than merely protecting the issuer from becoming exposed to the underlying transaction. Rather, it reflects a "seemingly strong policy honoring letters of credit"68 and providing the "certainty that should accompany letter of credit transactions."69 Such a policy is best furthered by prohibiting all injunctions against honor, not just those brought against the issuer, because certainty of payment will be eroded if the beneficiary can be enjoined.70 Hence, the Ninth Circuit reached a contrary result to that of the Court of Appeal, even though both courts reasoned according to the purpose of the California provision. The Trans Meridian Trading case also
65. [d. at 1058, 206 Cal. Rptr. at 222. 66. [d. at 1059, 206 Cal. Rptr. at 222-23. 67. 829 F.2d 949 (9th Cir. 1987). 68. [d. at 956. 69. [d. at 955. 70. [d. at 956. In Trans Meridian Trading, the Ninth Circuit also distinguished the
facts of Mitsui Manufacturers Bank, supra note 64, on the un persuasive ground that in the Mitsui Manufacturers Bank case the letter of credit specifically referenced the un derlying contract, thereby bringing the underlying contract into issue, whereas the letter of credit in the Trans Meridian Trading case did not mention the underlying contract. Trans Meridian Trading, 829 F.2d at 957.
20
demonstrates that purpose reasoning can be used to reject pro posed exceptions to Code provisions as well as to create them.71
3. Interpretation to Avoid Contradicting Purpose of Provision
Courts have interpreted Code prOViSIOns in order to avoid contradicting or defying the purpose of the provision. Such rea soning can cause a court to create an exception to a Code provi sion in order to avoid applying the provision to facts where its purpose would be defied. Conversely, a court might refuse to create an exception to a provision where the exception would
71. In S & R Metals, Inc. v. C. Itoh & Co. (America), 859 F.2d 814 (9th Cir. 1988), the Ninth Circuit rejected another proposed exception to a Code provision where the purpose of such an exception did not apply to the facts of the case. The relevant provi sion was continued in U.C.C. § 2-608(1) whereby a buyer who satisfies certain conditions "may revoke his acceptance of a lot or commercial unit." Both "lot" and "commercial unit" are defined in such a way that revoking acceptance of a lot means revoking accept ance of an entire delivery, whereas revoking acceptance of a commercial unit means re voking acceptance of a portion of a delivery. Thus, an aggrieved buyer qualifying under § 2-608(1) has the option to revoke as to either all the goods delivered or a portion thereof. In the S & R Metals case the seller argued for an exception to the buyer's § 2-608(1) option whereby, due to the facts of the case, the buyer would be required to revoke only as to a commercial unit and not allowed to revoke as to the whole lot. In this case, plaintiff bought various gauges of steel from defendant. Plaintiff could establish that the 14-gauge steel delivered by defendant, constituting one-fourth of the total tonnage under the parties' contract, was defective. Nevertheless, plaintiff revoked its acceptance of the entire delivery of steel of all gauges. Defendant argued that, on these facts, plaintiff should be allowed to revoke only as to the defective 14-gauge steel and not as to the entirety. Despite the seemingly clear option given to a buyer to revoke either a lot or a commercial unit under § 2-608(1), defendant argued that plaintiff could not revoke as to the entire "lot" but only the lesser "commercial unit" of 14-gauge steel, because it would be unfair to permit plaintiff to revoke the entirety when such a small proportion was defective. Under this logic, the entire shipment consisted of two commercial units, defec tive 14-gauge steel and non-14 gauge steel. Because plaintiff could not prove that the non-14-gauge steel was defective, plaintiff should not be allowed to revoke as to that commercial unit. Thus an exception to the buyers right to revoke as to a whole lot should be created when the defective portion is small.
The Ninth Circuit rejected the defendant's proposed exception to the buyer's right to revoke as to the whole lot under § 2-608(1). The court reasoned that the purpose of the "commercial unit" option is to prevent a buyer who has elected not to revoke a whole lot from taking advantage of the situation by returning to the seller less than a commer cially resalable unit. Under the "commercial unit" option, a buyer may not return com ponents of an item that have a reduced market value compared to the item itself and thereby leave the seller in an unfair position. In the S & R Metals case, by contrast, the buyer returned more than a commercial unit and did not prejudice the seller by re turning too little. Therefore, because the purpose of the commercial unit option is not served in this situation, it is not necessary or even logical to impose that option on the buyer, especially to the exclusion of the buyer's alternate remedy of revoking as to the whole lot.
21
defy the purpose of the provision. A court using such reasoning might also interpret gaps and ambiguities in the statutory lan guage in such a way as to avoid contradicting the purpose of the provision.72
72. Another Code provision which has been interpreted to avoid contradicting its purpose is California Commercial Code § 6111, which provides that the one-year statute of limitations for defrauded creditors of a bulk transferor begins to run when the trans feree takes possession of the goods, but where "the transfer had been concealed" the one-year statute does not begin to run until the creditors discover the bulk transfer.
California Commercial Code § 6111 provides a one-year limitations period as does the newly revised U.C.C. § 6-110 (1988 Official Text). The two versions both provide that where the transfer has been concealed, the limitations period runs from the date when the person bringing the action discovers the bulk transfer. Revised U.C.C. § 6-110 (1988 Official Text) provides:
§ 6-110. Limitation of Actions. (1) Except as provided in subsection (2), an action under this Article against a buyer, auctioneer, or liquidator must be com menced within one year after the date of the bulk sale. (2) If the buyer, auctioneer, or liquidator conceals the fact that the sale has occurred, the limitation is tolled and an ac tion under this Article may be commenced within the earlier of (i) one year after the person bringing the action discovers that the sale has occurred or (ii) one year after the person bringing the action should have discovered that the sale has occurred, but no later than two years after the date of the bulk sale. Complete noncompliance with the requirements of this Article does not of itself constitute concealment. (3) An action under Section 6-107(11) must be commenced within one year after the alleged violation occurs.
California Commercial Code § 6111 provides in relevant part: (a) No action under this division shall be brought nor levy made more than one year after the date on which the trans feree took possession of the goods unless the transfer has been concealed. If the transfer has been concealed, an action may be brought or levy made within one year after its discovery by the creditor bringing such action or making such levy or after it should have been discovered by such creditor in the exercise or reasonable diligence, whichever first occurs.
In In re Borba, 736 F. 2d 1317 (9th Cir. 1984), the facts cast doubt on when a trans fer had been concealed. There the transfer had been concealed in the sense that the bulk transferee had not complied with the notice requirements of Article 6. However, no addi tional affirmative acts of fraud or concealment had taken place. Therefore, the Ninth Circuit had to interpret whether the transfer had been "concealed" solely by reason of the transferee's failure to comply with the bulk transfer notice requirements. Because the transfer had taken place more than a year prior to the transferor's bankruptcy, the cause of action in In re Borba would be barred if the transfer had not been "concealed."
The Ninth Circuit Court of Appeals held that the special statute of limitations for concealment situations does not apply where the "concealment" consists only of a failure to comply with the requirements of the Bulk Sales Article. The Court reached its result in order to avoid contradicting the purpose of the usual statute of limitations (commenc ing on the date the transferee took possession). The purpose of the usual statute of limi tations is to require prompt action by the aggrieved creditors, whereas the "conceal-
22
In Bank of the West v. Commercial Credit Financial Ser vices, Inc.'3 the Ninth Circuit created an exception to a Code provision because the application of the provision to the facts of the case would contradict the purpose behind the provision. The first-to-file rule of section 9-312(5)(a)" provides that where two perfected secured parties have an interest in the same collateral, the first of the secured parties to have properly filed a financing statement on the collateral has priority over the other. In Bank of the West the following situation occurred: (1) perfected se cured party A filed first in time on debtor A's accounts receiva ble, including after-acquired receivables; (2) perfected secured party B filed subsequently in time on debtor B's accounts re ceivable, and (3) debtor B transferred its accounts receivable to debtor A.7Ii Because both secured party A and secured party B on these facts have a perfected security interest in the collateral in the hands of debtor A,'s it is necessary to determine which
ment" statute of limitations is intended to permit such creditors extra time. To treat a failure of notice as a concealment would contradict the purpose of the usual statute of limitations by permitting all creditors who failed to receive notice to elect the more gen erous "concealment" statute of limitations. In re Borba, 736 F.2d at 1320. This result is consistent with the provision of the newly revised U.C.C. § 6-110(2) that "[cJomplete noncompliance with the provision of this Article does not of itself constitute concealment. "
73. 852 F.2d 1162 (9th Cir. 1988). 74. U.C.C. § 9-312(5)(a) codifies the first-to-file rule. Actually, the rule is more accu
rately stated as preferring the first secured party who either files or perfects in prefer ence to other secured parties. U.C.C. § 9-312(5)(a) provides:
(5) In all cases not governed by other rules stated in this sec tion (including cases of purchase money security interests which do not qualify for the special priorities set forth in sub section (3) and (4) of this section), priority between conflicting security interests in the same collateral shall be determined according to the following rules:
(a) Conflicting security interests rank according to prior ity in time of filing or perfection. Priority dates from the time a filing is first made covering the collateral or the time the security interest is first perfected, whichever is earlier, pro vided that there is no period thereafter when there is neither filing nor perfection.
75. Bank of the West, 852 F.2d at 1164-66. 76. Secured party A has a perfected security interest in the disputed collateral by
virtue of its after-acquired collateral clause. U.C.C. § 9-204(1) provides, with exceptions, that "a security agreement may provide that any or all obligations covered by the secur ity agreement are to be secured by after-acquired collateral." Therefore, when debtor A subsequently acquired the collateral, secured party A, having previously filed on such collateral, gets a perfected security interest it. On the other hand, secured party B is perfected in such collateral, even in the hands of debtor A, by virtue of U.C.C. § 9-306(2), which provides:
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has priority. Between these two perfected secured parties the first-to-file rule would indicate that secured party A would pre vail over secured party B because secured party A filed first in time on the accounts receivable. This was the result reached by the district court in this case.77
Reasoning that the purpose of the first-to-file rule is at odds with its application to this situation, the Ninth Circuit Court of Appeals reversed the district court on this issue and created a new exception to section 9-312(5)(a) whereby the later filing transferor's secured party prevails over the earlier filing trans feree's secured party who claims under an after-acquired collat eral clause. One purpose of the first-to-file rule that would be defeated by its application in Bank of the West is to give assur ance to the first filer on a particular debtor that it will enjoy priority with respect to that debtor's collateral. This is the car rot to guarantee prompt filing. When the transferor's secured party (secured party B) has complied with the filing require ments with respect to the transferor (debtor B), it would violate this purpose to deny priority to the transferor's secured party. Secured party B filed first on debtor B and thus gave notice to subsequent creditors of debtor B; yet its deserved reward of pri ority is lost if the first-to-file rule applies after debtor B trans fers the collateral to debtor A.78 Another purpose of the first-to file rule which would not be served here is to ensure that record notice of security interests is given to future creditors of a debtor. This "notice-giving" function is not achieved in the Bank of the West situation because a filing by secured party A against debtor A imparts no notice to the creditors of debtor B, including secured party B, because debtor B's creditors will search the record for filings against debtor B, not debtor A.79
Another decision creating an exception to a Code provision
(2) Except where this Article otherwise provides, a security in terest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including col lections received by the debtor.
77. Bank of the West v. Commercial Credit Financial Services, Inc., 655 F. Supp. 807,817 (N.D. Cal. 1987).
78. Bank of the West, 852 F.2d at 1173. 79. [d. at 1172-73.
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in order to avoid contradicting the purpose of the provision is Great Southwest Life Ins. Co. v. Frazier.80 The provision at is sue was section 3-606(1)(b),81 which provides for the discharge of "any party to the instrument" when the holder "(u)njustifiably impairs collateral for the instrument given by . . . the party." When the holder of a note impairs collateral by exchanging it for less valuable collateral, the maker's liability will increase to the extent that more debt will be left owing after application of the substituted collateral than would have been owing if the original collateral were still available. By the literal wording of section 3- 606(1)(b) it would seem that the maker ought to be discharged in this situation. Certainly the maker would seem to qualify as "any party to the instrument." Yet in Great Southwest Life the Ninth Circuit recently recognized an exception to section 3- 606(1)(b) by holding that "any party to the instrument" does not include the maker.82 The court determined from Official Comment 183 to section 3-606 that this provision is intended to protect parties in the position of a surety (e.g., a guarantor or accommodation maker). The court reasoned that it would con flict with this purpose to permit the maker, who is not a surety, to be discharged. Therefore "any party" does not include the maker. Although it would seem that "any party" simply does not mean "any party but the maker," by reasoning that the drafter's purpose is not to benefit the maker, it is logical to except the
80. 860 F.2d 896 (9th Cir. 1988). 81. U.C.C. § 3-606(I)(b) provides:
(1) The holder discharges any party to the instrument to the extent that without such party's consent the holder
(b) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse.
82. Great Southwest Life, 860 F.2d at 900-01. The holding that "any party" to the instrument does not include the maker of the instrument, is in accord with that of most other jurisdictions. See e.g., FDIC v. Blue Rock Shopping Center, 766 F.2d 744, 749-51 (3d Cir. 1985); United States v. Vahlco Corp., 720 F.2d 885, 890 (5th Cir. 1983); see also Annotation, 93 A.L.R. 3d 1283 (1979 and supp. 1988).
83. Official Comment 1 to U.C.C: § 3-606 provides: The words "any party to the instrument" remove an uncer tainty arising under the original section. The suretyship de fenses here provided are not limited to parties who are "secon darily liable," but are available to any party who is in the position of a surety, having a right of recourse either on the instrument or dehors it, including an accommodation maker or acceptor known to the holder to be so.
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maker from the term "any party to the instrument."
A court might also refuse to recognize an exception to a Code provision on the ground that the exception would contra dict the purpose of the provision, as in Ford Motor Credit Co. v. Price.8
• In this case, Ford Motor Credit argued for an exception to the statutory requirements for notice of sale of collateral based on its substantial compliance with those requirements. The California Commercial Code contains a unique variation from the Uniform version with regard to the required notice of sale of collateral under section 9-504(3),811 so that, among other things,88 notice of a public sale must appear in a newspaper pub lished in the county where the sale is to be held, whereas the U.C.C. requires only that the secured party give "reasonable" notice of such sale.87 Ford had published notice in the wrong county and sought to argue that it had nevertheless substan tially complied with section 9-504(3). The California Court of Appeal reasoned that an exception based on Ford's substantial compliance would undermine the very purpose of the California provision. That purpose is to prevent undue litigation as to what notice is required for a valid foreclosure sale by instructing the foreclosing secured party exactly how to proceed with notice.88
This is in contrast to the more general "reasonable" notice stan-
84. 163 Cal. App. 3d 745, 210 Cal. Rptr. 17 (1985). 85. California Commercial Code § 9504(3) provides in part:
Notice of the time and place of a public sale shall also be given at least five days before the date of sale by publication once in a newspaper of general circulation published in the county in which the sale is to be held.
No such requirement appears in the U.C.C. See U.C.C. § 9·504(3), supra note 29. 86. In addition to the requirement of notice of sale by publication, California Com·
mercial Code § 9504(3) varies from the U.C.C. by more carefully defining the required notice of sale to be given to the debtor:
Such notice must be delivered personally or be deposited in the United States mail postage prepaid addressed to the debtor at his address as set forth in the financing statement or as set forth in the security agreement or at such other address as may have been furnished to the secured party in writing for this purpose, or, if no address has been so set forth or fur· nished, at his last known address, and to any other secured party at the address set forth in his request for notice, at least five days before the date fixed for any public sale or before the day on or after which any private sale or other disposition has been made.
87. See U.C.C. § 9·504(3), supra note 29. 88. Ford Motor Credit, 163 Cal. App. 3d at 750·51, 210 Cal. Rptr. at 20·21.
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dard of the U.C.C., which invites litigation by its uncertainty. The suggested exception for substantial compliance would rein troduce the uncertainty and potential for litigation that the Cal ifornia notice provisions are intended to remove. Therefore, the court refused to create such an exception.89
The Ninth Circuit recently interpreted a gap in the concep tual scheme of section 2-20790 in order to avoid contradicting the purpose of that section in Diamond Fruit Growers, Inc. v. Krack Corp.9} Under section 2-207 a contract may be formed even though the terms of the acceptance vary those of the offer. How ever, if the acceptance expressly conditions acceptance on the offeror's assent to the offeree's varying terms contained in the acceptance, the parties differing forms do not result in a con tract unless the offeror assents to the varying terms in the ac ceptance. If the offeror assents, the parties have a contract and the offeree's varying terms are part of that contract. If the of feror does not assent, there will be no contract unless the parties proceed with the transaction, in which case their performance
89. [d. at 751, 210 Cal. Rptr. at 21. 90. The court applied and interpreted Oregon law identical to u.c.C. § 2-207, which
provides: § 2-207. Additional Terms in Acceptance or Confirmation. (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms addi tional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the ad ditional or different terms. (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms be come part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or (c) notification of objection to them has already been
given or is given within a reasonable time after notice of them is received. (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a con tract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, to gether with any supplementary terms incorporated under any other provisions of this Act.
91. 794 F.2d 1440 (9th Cir. 1986).
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results in the formation of a contract by conduct.92 Within this framework there lurks an ambiguity. When the acceptance is conditioned on the offeror's assent to the offeree's varying terms, it is unclear what constitutes the offeror's assent that would form a contract on the offeree's terms. Such assent might argua bly be interpreted to include an implied assent based on the of feror's performance of the deal after the offeree has made known its varying terms, or such assent might arguably be interpreted more narrowly to require the offeror's express assent.
In Diamond Fruit Growers, the Ninth Circuit held that the offeror's assent must be express and cannot be implied from the offeror's performance of the parties' deal. The court reasoned that the purpose of section 2-207 is to achieve neutrality be tween offeror and offeree by expunging the "last shot" rule.9a
~
4. Interpretation Adopted Because Supported by Purposes of Code Generally
Sometimes courts have interpreted an ambiguous Code pro vision by resort to the more general purposes of the Code, rather than the purpose of the provision at issue. These general pur-
92. [d. at 1443-44. Such a contract by conduct is recognized by U.C.C. § 2-207(3). Under § 2-207(3) the terms of such a contract are "those terms on which the parties agree, together with any supplementary terms incorporated under any other provisions of [the U.C.C.I." See U.C.C. § 2-207(3), supra note 90.
93. Diamond Fruit Growers, 794 F.2d at 1444. 94. [d. at 1445.
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poses include the accommodation of commercial practices,9& the goal of uniformity among the jurisdictions,96 and the promotion of good faith.9? It is also possible to interpret a provision accord ing to the more general purposes of an Article of the Code.
The Ninth Circuit recently interpreted an ambiguous provi sion in order to accomplish the general Code purpose of accom modating commercial practices in In re Black & White Cattle CO.98 The provision at issue was section 2-402(2)99 whereby a merchant-seller may retain possession of goods sold for a "com mercially reasonable time" without violating the Fraudulent Conveyance Act. loO Ordinarily, a seller may not retain possession of goods sold because such retention would mislead creditors as to the ownership of the goods, but an exception to this require ment occurs when retention is only for a "commercially reasona-
95. According to u.c.C. § 1-102(2)(b), supra note 11, one of the underlying purposes of the V.C.C. is to "permit the continued expansion of commercial practices through cus tom, usage and agreement of the parties." The court in In re Black & White Cattle Co., 783 F.2d 1454 (9th Cir. 1986) found in V.C.C.§ 1-102(2)(b) a broad Code purpose to accommodate commercial practices. [d. at 1460. See infra text accompanying notes 98- 102.
96. According to U.C.C.§ 1-102(2)(c), supra note 11, one of the underlying purposes of the U.C.C. is "to make uniform the law among various jurisdictions." An example of a decision where a court adopted an interpretation at least in part to conform to the ma jority view of other jurisdictions, and thereby further the purpose of making the law uniform among the jurisdictions, is Connolly v. Bank of Sonoma County 184 Cal. App. 3d 1119, 1125, 229 Cal. Rptr. 396, 400 (1986). For a discussion of the purpose reasoning in Connolly, see supra text accompanying notes 28-36.
97. V.C.C. § 1-203 provides: § 1-203. Obligation of Good Faith. Every contract or duty within this Act imposes ap obligation of good faith in its performance or enforcement,
In Allied Grape Growers v. Bronco Wine Co., 203 Cal. App. 3d 432, 442, 249 Cal. Rptr. 872, 877 (1988), the court reasoned in part that its interpretation of the statute of frauds was justified because it was consistent with the general Code purpose of fostering good faith.
98. 783 F.2d 1454 (9th Cir. 1986). 99. V.C.C. § 2-402(2) provides:
(2) A creditor of the seller may treat a sale or an identification of goods to a contract for sale as void if as against him a reten tion of possession by the seller is fraudulent under any rule of law of the state where the goods are situated, except that re tention of possession in good faith and current course of trade by merchant-seller for a commercially reasonable time after a sale or identification is not fraudulent.
100. The relevant fraudulent conveyance legislation was CAL. CIV. CODE § 3440, which provides that a transfer is void against the transferor's creditors where the trans fer is "not accompanied by an immediate delivery followed by an actual and continued change of possession" of the property transferred.
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ble time." In Black &a

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Commercial Law - Interpreting the Uniform Commercial Code